The Fitch rating agency has downgraded Greece's long-term debt ratings, saying the outlook for Greek public finances was negative. This marks the second such rating blow for Greece in two days.
The decision could also place the euro zone under new strain as it places Greek debt in a danger zone regarding requirements by the European Central Bank for bonds it will accept as collateral when banks seek short-term funds.
Fitch downgraded Greek long-term debt ratings to BBB+ from A-, warning that the outlook was negative because of the prospects for public finances 'given the weak credibility of fiscal institutions and the policy framework'.
The news shook the Greek stock market, which closed down 6%.
The yield on Greek bonds was 2.2 points wider than the benchmark German 10-year bond this afternoon as a result. This means it is more expensive for the Greek government to borrow money on international markets.
Analysts at Goldman Sachs said the downgrading was 'important'. This was because it marked the first time the credit rating of bonds issued by a government in the euro zone had dropped to a point at which they would not be eligible for use as collateral at the ECB except for a 'temporary change of rules' in response to the financial crisis.
Goldman Sachs said that this temporary easing of the quality of bonds acceptable to the ECB was due to last until the end of next year, and that if one of the other main rating agencies, Moody's or Standard and Poor's, downgraded Greek debt, there would be a problem.
Banks use such bonds as collateral in order to qualify to bid to borrow the cheapest money available, from the ECB, under regular arrangements.
Banks handicapped by being unable to offer such collateral would therefore be excluded from a central activity of the euro zone, would have to replace those funds usually obtained from the ECB with more expensive money from the market, and would lose competitiveness.
The downgrading was the second blow to the credibility of Greek debt and of policy by the new socialist administration in Greece, coming hours after Standard and Poor's put Greek debt under 'negative' watch and warned of a downgrading if the government did not attack its overspending.
Fitch said that the weak credibility of government policy in Greece was 'exacerbated by uncertainty over the prospects for a balanced and sustained economic recovery'.
In the last few weeks, there has been discussion in daily notes by analysts that the strains in Greece could create the conditions for a bond crisis in the euro zone. Greece has set a target of cutting spending by 3.6 percentage points to 9.1% of economic output next year.